INSIGHT: Indirect Share Transfer Exemption under the India–Belgium Tax Treaty

The Mumbai Bench of Income-tax Appellate Tribunal (Tribunal) analyzed the indirect share transfer provisions in India to confirm gains arising to a Belgium company from the transfer of a Singapore company shares with a step-down Indian subsidiary are not taxable in India under the provisions of Article 13(6) of the India–Belgium tax treaty (tax treaty).

Facts

Sofina S. A. is a Belgium tax resident (Sofina). Sofina is a venture capital investor listed on Euronext, Brussels which had invested in start-ups in India. Sofina invested across nine countries in two continents.

Sofina had subscribed to Series B preference shares of Accelyst Pte Ltd (Singapore Company)—a tax resident of Singapore. Sofina agreed to additionally subscribe to Series C preference shares of the Singapore Company comprising of an 11.34% stake in the Singapore Company. The Singapore Company, through a multi-layered structure, held majority shares in Accelyst Solutions Pvt. Ltd (Indian Company).

In order to liquidate, Sofina sold its entire stake of 11.34% Series C preference shares held in Singapore Company to an independent Indian company. The Indian buyer, while making the payment of consideration to acquire Singapore Company shares to Sofina, withheld tax under the Indian domestic laws.

Sofina, while filing its tax return in India claimed that gains arising from alienation of the shares sold were exempt and taxable in the resident country of the alienator, i.e. Belgium under Article 13(6) of the tax treaty applying the case of Sanofi Pasteur Holding SA and claimed a tax refund of the amount withheld by the Indian buyer.

The Revenue Authorities (Revenue) invoked the provisions of indirect share transfer under the Indian domestic tax laws by considering that the shares of the Singapore Company were deemed to be situated in India, since it derived its substantial value (50% or more) from investment in the Indian Company. Accordingly, the Revenue held that Sofina had indirectly transferred shares of an Indian company (through Singapore), which was regarded as taxable in India.

Additionally, the Revenue alleged that the Singapore Company was deemed to be a resident of India under the charging provisions of Indian domestic tax laws. Consequently, as the Singapore Company derived value from Indian company shares, the Revenue treated gains arising on sale of the Singapore Company shares by Sofina as taxable in India under Article 13(5) of the tax treaty. The Dispute Resolution Panel (DRP) upheld the Revenue’s order.

Sofina, aggrieved by the Revenue stand and the DRP order, appealed before the Tribunal to evaluate whether the shares of the Singapore Company is deemed to be situated in India in the absence of indirect share transfer provisions prevalent under the tax treaty.

Also, the question arises if the Singapore Company is deemed to be a resident of India under both Indian domestic laws or under the tax treaty and if the gains arising to Sofina from the sale of Singapore Company shares are chargeable to tax in India.

Tribunal Ruling

The Tribunal analyzed the provisions of Article 13(1), 13(2), 13(3) and 13(4) of the tax treaty to conclude on their inapplicability to the facts of the case, since the gains were derived from the alienation of preference shares of a Singapore tax resident company.

On review of Article 13(5) of the tax treaty it was observed that the provision deals with alienation of shares [excluding those covered under of Article 13(4)] representing a participation of at least 10% of the capital stock of a company which is a resident of a Contracting State.

Importantly, one of the conditions states that the company whose shares are transferred should be a resident of Belgium. Since the Singapore Company shares were not transferred by a resident of India or Belgium, Article 13(5) of the tax treaty was inapplicable. Further, under Article 13(6) of the tax treaty, such gains would only be taxable in Belgium and not in India.

The indirect share transfer provisions of the Indian domestic laws incorporated a “look-through” approach and unlike Article 13(4) of the tax treaty, which envisages a “look-through” concept (limited only for immovable property), Article 13(5) of the tax treaty, in the absence of express language “directly or indirectly,” does not provide for a “look-through” capability. Therefore, the transfer of shares of the Singapore Company cannot be regarded as transfer of shares of Indian Company, as supported by the High Court’s judgment in the case of Sanofi Pasteur Holding SA.

Further, the Tribunal stated that in the absence of corresponding indirect share transfer provisions in the tax treaty, the deeming indirect share transfer rules of the Indian domestic law cannot be read into the tax treaty.

Such a unilateral amendment in a domestic law cannot be permitted to override the provisions of the tax treaty following the cases of New Skies Satellite BV and Siemens Aktiengesellschaft (2009) 310 ITR 0320 Bombay High Court. The Tribunal also held that the indirect share transfer rules do not treat or deem a foreign company as Indian resident, and agreed with Sofina’s argument that a foreign company can be deemed resident of India for underlying assets situated in India only if after an amendment is made in the residency rules of Indian domestic law and Article 4 of the tax treaty.

Finally, the Tribunal concluded that gain would only be taxable in Belgium to the alienator of the shares, i.e. Sofina is a resident and such gains arising from the transaction of transfer of shares of the Singapore Company by Sofina are not chargeable to tax in India under the tax treaty.

Planning Points

The Tribunal ruling is in line with the Authority for Advance Rulings of GEA Refrigeration Technologies GmbH which relied on the Sanofi Pasteur Holding SA case to resolve the issue of taxability of indirect transfer of shares under the India-German tax treaty.

The interpretation of applying the “look-through” approach unless specifically provided cannot be read into the provisions of the tax treaty is also consistent with the established principles in various cases.

It would be relevant to note that India has issued a synthesized version of the tax treaty with Belgium that incorporates the object and purpose clause in the preamble of the tax treaty.

As India and Belgium form part of the covered tax agreement of the multilateral instrument any tax treaty claim benefit considering the indirect share transfer case should be used only without creating any situation of non-taxation or reduced taxation causing tax evasion or avoidance, including treaty-shopping arrangements.

Also, reference can also be made to “The Taxation of Offshore Indirect Transfers” discussion draft issued under the guidance of the International Monetary Fund, Organization for Economic Co-operation and Development, United Nations and World Bank Group, which specifically recognized the significance of indirect share transfer and aims to standardize it for all countries.

Shailendra Sharma is a Chartered Accountant associated with a multinational financial services firm, India.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.